A dangerous gap between Wall St and Main St. Stocks soar ignoring bleak economy. Making sense of Sensex. Something’s got to give. Why the disconnect? Two charts to explain it. Five reasons behind it. Damn you, Fed. Will it sustain. Beware of bulls charging on liquidity steroids. What is market trying to tell us. Our strategist’s take. IMF warns on disconnect. Insanity?
Silly headlines from columnists shouldn’t surprise anyone. Unfortunately, there’s a deep-rooted belief underlying these headlines that’s worse than silly. That practicing investors, and not merely professional commentators, also subscribe to this belief makes it outright dangerous. That this belief is subconscious rather than explicit makes it doubly dangerous.
I refer to the belief that, at any point of time, there’s a ‘right’ level for stock-markets. If explicitly asked where market’s headed, many may plead ignorance. However, most people are far from indifferent about this. Market just doesn’t feel right to them. They can’t shake off this feeling. It bugs the crap out of them. There are a few dimensions to it: (a) normative; (b) causal; (c) directional. Normative pertains to the idea that an extreme manifestation of our messy world should behave in a prescribed manner. Causal follows normative, because we hate voids. We reflexively add a ‘because’ to ‘should. Markets should tank because economy sucks. If it sounds plausible, it must be correct. If there’s a disconnect between where markets are and where they should be, there’s an (implicit) expectation that market direction will minimize this dissonance.
This belief is dangerous nonsense. Let me first cover ‘nonsense’ before getting to ‘dangerous’. The wisest man to ever grace stock markets summarised it as manic depressive in his Mr Market representation. Keynes viewed it as popularity contest, where level and direction had little to do with reality. Other investors with illustrious track records have opined on similar lines. A complex social system with violent feedback loops built on fickle emotions of herding humans isn’t supposed to make sense, let alone feel right, at any point in time. Apart from a propensity to unevenly drift upwards, if the scale on the x-axis is decadal, markets are pretty much stochastic. The trouble is that even those who pay homage at the altar of Graham and Keynes haven’t internalized this deeply discomforting aspect. It’s hard to get out of bed if I accept that my entire professional existence revolves around a nonsensical and whimsical fantasyland. Deep down, most believe that they can make extract sense out of nonsense.
This belief is dangerous as it messes with our minds. Assume that I subconsciously buy into all this market-economy disconnect babble. Market doesn’t feel right. It feels too high. I can’t stop there. I have to take this to its logical end. It should go down. By how much? At what level will it feel right? Which parts should decline more than others? Until when? How will I know it’s done falling? What if it gets there but still doesn’t feel right? Do I start again? You get the drift. There’s no end to this rabbit hole.
I have a short list of wonderful businesses on which I’ve spent years developing comfort and conviction. A subset of these are buyable or nearly there (not as many as in March-April though). All that’s left is for me is to buy them, and pen a ‘Thank you’ note to Mr Market. Simple, no? Not if I let my mind get messed up in the aforementioned manner. My desire to ‘make sense’ and ‘feel right’ does not stop at the abstract level of the stock market. It inevitably percolates into stock prices of every one of my lovely businesses. I’ll go down the same rabbit hole with each of them. A reasonable price suddenly doesn’t ‘feel’ right or in sync with headlines of the day. I’ll freeze into inaction, until it’s too late, at which point I’ll get jolted into FOMO. And a different form of mind messing will commence.
While I am personally irreligious, I believe that our ancient religions figured out the answer. Live in the moment, stay detached and focus on actions over unknowable consequences. Markets shouldn’t have to be anywhere. They just are. Since I graduated, Sensex has gone from 3K to 6K to 4K to 21K to 8K to 42K to 25K to 37K, with many more gyrations along the way. Looking back, I can’t think of any point at which I felt like it was where it should be. The only attitude that would’ve let me profit from 3K becoming 37K is one of enlightened detachment towards its vicissitudes. Enlightened enough to know that good things happen over decades, especially if I am careful about what I own. Detached enough to not have an explanation for every twist and turn along the way.
This is psychologically painful, as it’s at the cusp of multiple behavioural quirks. As inveterate story-tellers, we feel compelled to explain patterns around us, real and imagined. As social animals, we align our story with popular narrative. Having settled on a pet narrative, we reinforce it through rationalizing and confirmation, until we don’t know whether we’re driving the narrative or vice versa. The detachment that I mention isn’t about having a contrarian narrative. While that’s hard, I am at least left with a sense of superiority. Detachment is about not having a narrative at all for my immediate professional context, while all around me have smart-sounding ones. This is harder, as I feel like a complete dunce. So, I am not arguing that there’s no disconnect between markets and economy. I neither know nor care, as I have no idea what that connect is supposed to be, now or ever.
If I can live with feeling like the dumbest one around, I can get to the last part. Stay indifferent to markets, unless they offer me something actionable. If so, I act. In not, I get back to reading, anything but silly articles about making sense of the market.
[PS. I deliberately didn’t take the route of markets discounting the future and looking through transient economic pain. If I took this route, I may be tempted to ask if the discounting machine had it right at 25K? At 30K? At 37K? At a hypothetical 20K? Is this a moving target? If so, linked to what? If one of these levels felt more right, what does it mean for other levels? Even a superficially plausible way of making sense of markets doesn’t hold up beyond a point. It’s better to make peace with markets as meaningless at any point. This is as discomforting as it is lucrative.]